After touching much-talked about gauge of hope, the 200 DMA (daily moving average), the Nifty failed to close above the same. Against average gains of 5% in the past five weeks, the index just managed to end above its last Friday’s close, moving higher by a mere 1%.
Its international peer Dow Jones Industrial Average (DJIA) has not budged much from its previous week’s close, as on Thursday’s close. The question that begs most market participants is whether we are at the peak of a bear market rally or the bottom has been made for good?
Comparing the Dow’s current performance with the great depression days, more trading weeks or even months may be required for the answer to unfold. During the great depression, the Dow topped out at 381 in September 1929 and fell as low as 199 in November , but showed a striking rebound of more than 45% in April 1930. But hold our breadth; this was not a bottom indeed. In the late 1930, the Dow made a new low of 158 and continued to decline further before eventually bottoming out at 41 in July 1932.
Let me make it clear that with this reference, we are not being cynical. But it may be too early to conclude whether the markets have already made a bottom.
200 DMA: A Difficult Territory
The Nifty started the week on a buoyant note and managed to briefly touch 3500 for the first time since October . However, barring Wednesday, it has failed to close above its 200 DMA for two subsequent sessions. As the first chart reveals, the index last moved above this decisive indicator in April 2008. In mid –April last year, it closed above this frontier, but surrendered all its gains within three days and reverted back to its losing streak.
This time around, however, what could save the Nifty from a plunge is the strong support at 3150, which was closer to November and December highs. Meanwhile the gap between the 20 and the 50 DMA is widening. Moreover, even after a more-than-13 % decline on Friday, the volume build-up looks decent. This keeps the hope of a run above this Lakshmanrekha intact.
Besides the 200 DMA, what makes us cautious is the ET Intelligence Group’s Smart Money Ratio (SMR). After entering buy territory in the third week of March, it has moved back into its 10-month range. Considering its past performance, this indicator’s proximity to its mid-March levels calls for alertness on the part of the bulls.
DJIA: Wariness ahead?
The Dow managed to close past the 100 DMA on Thursday. However, at the time of this article going to the press, it was struggling to register any gains from its previous close. The Dow’s affair with its 100 DMA is similar to that of the Nifty with its 200 DMA. As visible from the chart, like its Indian counterpart, the Dow managed to close above this key average in April last year.
But the respite turned out to be short-lived , with the index falling below this critical marker within a month. Currently, the trend line joining the July 2008 low with November and January 2009 highs, is acting as a strong hurdle. Even after a breach of this trend line, the Dow would have to move past the December lows near 8360 in order to maintain a positive momentum.
Fresh Trade
While the up tick in the SMR calls for caution, a portion of the increase is due to a sudden rise in the daily volatility. Then again, the domestic VIX has not turned out to be a competent indicator in the past. Conversely, the CBOE (Chicago Board of Options Exchange) VIX, which largely manages to capture the market sentiment well, on Thursday, closed below its trading range since September 2008, giving an affirmative sign.
Without sounding too pessimistic, we believe that 200 DMA and 3300 on the Nifty would decide the market move, going ahead. On a breach of 3300, one could expect the bears to raise their weight and the SMR will continue to move in the trading range it has entered.
On the other hand, if the SMR gets out of this range and enters into the buy territory, a subsequent break-out above the 200 DMA would indicate that we are in for a sprint.
20 Apr 2009, 0610 hrs IST
(source:ET)
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